ROI of M&A Transactions- Acquire For value ,Measure of Outcome

In the prior post, we talked about how important it is to track the ROI of Software Investments. Similar to Software Investments, another area where ROI tracking is of significant importance is M&A transactions. In the case of Software Investments, accounting treatment is slightly clear and more detailed. So, ROI will be a bit more operational metrics driven with the objective of aligning Operational Metrics to the Accounting Treatment.
In the case of M&A Transactions, accounting treatment is generally done through recording of Goodwill in the face of Balance Sheet. Goodwill is nothing but the additional value paid (tangible & intangible) to the acquiring/merging party which is over and above the value carried by the company being acquired/merged. While Goodwill measurement and accounting is pretty standard, where it gets slightly murky is the way Goodwill return is measured over a period of time.

Both IFRS and US GAAP standards mandate Goodwill Impairment test year on year as there is no lifetime for the asset(for public companies while private companies, it could depend) – basically it’s a test to check if the value recorded in Goodwill still holds good. And is generally done once a year. In some other GAAPs, Goodwill could be considered like any other intangible asset with a life time and gets amortized.

Goodwill being an intangible asset, its possible that the intrinsic value could increase or decrease depending on the how the acquired company performs. Accounting treatment of the increase or decrease again depends on the GAAP applicable.

While the above gives the rule of thumb when it comes to Accounting Treatment, it does not help much when it comes to measuring how the Goodwill actually is measured operationally. Given the non-detailed nature of how Goodwill is accounted or even for that matter a lack of clear Goodwill disclosure schedules (and it depends on the business/vertical), it becomes critical that a separate mechanism is established to ensure that the investment made is tracked to see if it has borne fruit.

We call it the ROI for M&A which starts with assigning accountability of the Goodwill value (basically which businesses will get the impairment hit and are accountable for the transaction/goodwill value). Once the accountability is established, a detailed process around defining the ROI metrics is needed so that they are tracked and assigned to Goodwill accounting tracking. Lastly, a solid platform with detailed Schedules need to be prepared so that the impact of the Goodwill continues to be measured & quantified. QuarkCube as a platform is ideally positioned to do a Goodwill schedule tracking along with Operational metrics for ROI measurement.

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